ServiceNow Inc

NYSE:NOW

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to ServiceNow's Fourth Quarter Fiscal 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Darren Yip, Vice President of Investor Relations, you may begin your conference.

[Darren Yip, Vice President-Investor Relations]

Good afternoon and thank you for joining ServiceNow's fourth quarter and full year 2021 earnings conference call. Joining me are Bill McDermott, our President and Chief Executive Officer; and Gina Mastantuono, our Chief Financial Officer. During today's call, we will review our fourth quarter 2021 results and discuss our guidance for the first quarter and full year 2022.

Before we get started, we want to emphasize that some of our information discussed on this call such as guidance is based on information as of today and contains forward-looking statements that involve risks, uncertainties and assumptions, including those related to the impact of COVID-19 on our business and global economic conditions. We undertake no duty or obligation to update such statements as a result of new information or future events.

Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and our 2021 10-K that will be filed or factors that may cause actual results to differ materially from those set forth in such forward-looking statements. We'd like to also point out that we have presented non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discuss today are non-GAAP, except for revenues, remaining performance obligations, or RPO, and current RPO. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website.

With that, I'd now like to turn the call over to Bill.

[Bill McDermott, President and Chief Executive Officer]

Thank you very much, Darren, and a warm welcome to everybody joining us on today's call. ServiceNow has once again delivered results that significantly beat the high end of expectations.

Here's the Q4 rundown in constant currency. Subscription revenue growth was 30%. CRPO growth was 32%. Free cash flow growth was 32%. Adjusted subscription billings growth was an exceptional 33%. Operating margin was 23%, one point over our guidance. We had a record 135 deals over $1 million, which was up 50% year-over-year. There has long been a Rule of 40 benchmark for highly successful software companies. These results demonstrate that ServiceNow operates beyond the Rule of 60. The company is expanding in all geographies, industries and buyer personas. Gina will share the details in a few moments, including our strong 2022 guidance.

ServiceNow is uniquely positioned. We're growing like a fast-moving start-up with the profitability of a global market leader. We're on a clear growth trajectory to $15 billion plus by 2026. While our strong cash position preserves optionality, we don't depend on M&A for growth. While rising interest rates challenge others, ServiceNow's business model is built to flourish in any economic environment. We are not opportunity constrained as our customers' need for digital transformation is ever expanding. Our organic growth machine is in full flight, and our pipeline is stronger than ever. Our 99% renewal rate is one of several lead indicators for sustained performance moving forward.

I'd like to thank all of our stakeholders, especially our customers for their steadfast confidence in ServiceNow. I'll give you the breakdown of our portfolio results, but first, let's discuss the market dynamics. We're in a sustained demand environment here. There are structural challenges facing every industry in every geographic region. The great resignation, supply chain disruption, inflation, to name a few. These underscore a point we have made consistently, the technology strategy has become the business strategy.

Digital technologies are growth-stimulating deflationary force. They power new business models, accelerating productivity while reducing costs. 85% of chief executives will sustain or increase technology budgets this year, and that's according to IDC's global CEO survey. IDC has increased their forecast for digital transformation, now a $10.7 trillion opportunity through 2025. Gartner forecasts worldwide software spending will increase 12% in 2022. The data shows this is clearly more than a pandemic-induced transformation.

A CEO I spoke to last week said it perfectly. “I have a long list of strategic priorities. Technology isn't one of them, it runs through all of them.” ServiceNow's Q4 results clearly validate the structural incline of this digital economy. As enterprises build, deploy, monitor and service technology, our IT workflow business is at the core. IT service management was in 16 of our top 20 Q4 deals, with 19 deals over $1 million. IT operations management was in 18 of our top 20, with 21 deals over $1 million.

Bell Canada, Canada's largest telco company, uses IT workflows and IT operations management to enable its operations. Our platform will improve critical dimensions of both asset management and the employee experience. ServiceNow will also be supporting the United States space force to connect its space operators with warfighters across the globe.

The hyper focus on hybrid work continues to propel our employee workflows business. HR service delivery was in 11 of our top 20 deals, with an exciting 24 deals over $1 million. Johnson Controls International, a smart building solutions leader, will use employee workflows to unlock productivity for its 105,000 employees. Together with ServiceNow, they are focused on creating a human-centered approach to the employee experience.

NVIDIA is using employee workflows to support its employee experience transformation. With ServiceNow, NVIDIA will provide its global employees a unified service model to support its mission by providing a frictionless employee experience. CVS Health will also leverage our technology and employee workflows to help deliver a best-in-class colleague experience.

As business integration is key to customer service, our customer workflows business is thriving. Customer service management was in 13 of our top 20 deals, with 10 deals over $1 million. Google Cloud plans to use our customer workflows to enhance its customer support operations. British Telecom chose ServiceNow to address the needs of its next generation of customers. The ServiceNow platform will help BT accelerate the delivery of new services from 36 weeks to three.

Our new industry vertical solutions also continue to gain traction with wins at major brands, including SaaS Institute, Deutsche Telekom and Wellstar. Technology teams alone can’t build the 500 million new applications IDC forecasts by 2023. Our creative workflows business is leading the citizen developer revolution. Our platform solutions were in 19 of our top 20 deals.

Lockheed Martin, the world’s largest aerospace and defense company, is using ServiceNow to support its enterprise digital transformation. They will use our creative workflows to help automate processes globally. Petrobras, a Brazilian energy company, is using creative workflows as the foundation for its application development function. They have already built over 26 applications such as onboarding for oil platforms and managing data privacy regulations. Together, these businesses, IT, customer, employee, creator, represent a next-generation suite built on a pure-play born in the cloud architecture. Our intuitive consumer-grade experience is expanding adoption of this platform everywhere, already 70 million users strong. This has created a unique moat in terms of ServiceNow’s strategic relevance in the enterprise.

From a geographic perspective, we’ve continued to see momentum worldwide. This includes APJ with wins at Samsung SDS in South Korea and NEC in Japan. In EMEA, we’re partnering with the French Postal Service, La Poste, and leading Italian energy company, NL.

As you can see, the digital opportunity is expanding dramatically for ServiceNow. Already, in 2022, we’re taking significant steps on our long-term roadmap. We’re introducing a state-of-the-art new solution, ServiceNow Impact. Leaders need a command center to navigate the fully connected world. ServiceNow Impact includes an intuitive consumer-grade mobile application that visualizes the value from transformation investments in real time on their device. As this experience speeds up user adoption, we anticipate a significant halo effect with broader consumption of our growing solutions portfolio.

As our market opportunities expand, we are promoting strong leaders for scale. As a result of the consistent speed and unmatched quality of our innovation teams, we are expanding CJ Desai’s role to Chief Operating Officer of the company. He will continue to lead products and engineering while also assuming industry and solution responsibilities for the company.

Our top sales leader, Kevin Haverty, has executed at an art form level for more than 10 years at ServiceNow. Kevin will also step into a strategic role for the company, serving as a mentor for the next-generation of ServiceNow leaders. He will work directly with me on expanding our footprint in the public sector worldwide.

Paul Smith will become Chief Commercial Officer, assuming our global sales responsibility. As ServiceNow’s President of Europe, Middle East and Africa, Paul has established himself as a leader of consequence who can broaden the geographic reach of ServiceNow. All regions in the company have outstanding leadership in place, and I’m very, very proud of the work they are doing indeed.

We’re also recruiting outstanding new leaders to the company. Karen Pavlin has joined ServiceNow to become Chief Diversity, Equity and Inclusion Officer. Karen joins from our great partner, Accenture, where she led this function. She will help us embed diverse strategies directly into our business strategy because inclusive companies outperform all the others. While our leadership team continues to strengthen, our inspired global workforce remains ever loyal.

Look at our retention rate. ServiceNow is not only recruiting great talent, we keep it. In the engineering function as an example, we see much lower attrition rates than any of our peer group benchmarks. While no company is immune from the war on talent, our unique culture puts us in a highly differentiated position. Our high rankings from Glassdoor show that our people are invested in ServiceNow’s bright future.

We see growth everywhere for ServiceNow. Our customers now view us as the standard platform for digital transformation. Our engineers continue to strengthen this highly innovative, scalable platform architecture. Our customer success teams have navigated the COVID challenges without missing a beat. Our partner ecosystem continues to build ServiceNow practices with even bigger commitments for long-term growth. The market forces are moving even more intensely in our direction.

For the future of work, businesses need to integrate disparate systems. Leaders are more invested in ESG than ever. There are 2 common thirds here. First, ServiceNow’s platform is purpose-built for each opportunity. Our new integrated ESG-in-a-box offering is a perfect example. Second, every company wants to become an exponential business. They cannot do that with linear processes. Of the 20 most valuable companies 30 years ago, zero are in the top 20 today. The question is then, which companies will be on that list 10 years from now? To be in that conversation, leaders need outcomes really fast. ServiceNow gives them the speed advantage they’re looking for. We’re empowering digital-first leaders to accelerate their vision.

Our purpose is to make the world work better for everyone. Our ambition is to be the defining enterprise software company of the 21st century. ServiceNow’s 2021 results and strong 2022 guidance signal our unshakable confidence in that goal. Our performance should leave no doubt, we are executing on all cylinders, and we will continue to do so. The world is looking for market leaders to build a new inclusive, sustainable wave of economic value, and ServiceNow is delivering. This is why we embrace the brand, the motto and the maxim. The world works with ServiceNow.

Thank you for your time. I look forward to your questions. Now over to our great CFO, Gina Mastantuono. Gina, over to you.

[Gina Mastantuono, Chief Financial Officer]

Thank you, Bill, and Happy New Year to everyone listening in. Q4 was a fantastic quarter, capping an already phenomenal 2021. Despite increased FX headwind, ServiceNow outperformed across all of our top line guidance metrics in Q4.

Our performance over the past couple of years not only exemplifies our unwavering focus on delivering customer success, but is a testament to the innovation and flexibility that Now Platform provides to our customers. Whatever the macro challenges were, ServiceNow adapted to deliver value.

ServiceNow’s ability to quickly respond to the needs of enterprises when and where they require us most is why we’ve become the trusted digital platform to drive transformation. It’s why our renewal rates are best-in-class, creating a solid foundation from which we grow upon each year. It’s why in 2021, we added more incremental subscription revenues than we reported in 2016.

I want to pause there for that to sink in. In 2021, we added a whole other 2016 ServiceNow to the top line, incredible organic growth at scale, while generating over 30% free cash flow margin.

Now turning to our Q4 results. Subscription revenues were $1.523 billion, growing 30% year-over-year in constant currency. We exceeded the high end of our guidance range by $3 million when adjusting for the incremental $15 million FX headwind we saw in the quarter we beat by $18 million. RPO ended the quarter at approximately $11.5 billion, representing 32% year-over-year constant currency growth. Current RPO was approximately $5.7 billion, representing 32% year-over-year constant currency growth and a nearly four point beat versus our FX-adjusted guidance.

Q4 subscription billings were $2.420 billion, a $110 million beat versus the high end of our guidance. This represents 32% year-over-year growth on a reported basis and 33% year-over-year growth on an adjusted basis as FX and duration were a headwind of 100 basis points.

From an industry perspective, energy and utilities more than doubled its net new ACV contribution from the year ago period. Business services and health care and life sciences also had a robust Q4, with very high double-digit net new ACV growth. Our renewal rate was a best-in-class 99%, continuing to demonstrate the stickiness of our business as the Now Platform remains a mission-critical part of our customers’ operations. These enterprises not only remain loyal ServiceNow customers, but our customer cohorts have continued to show solid expansion over time. As of the end of Q4, we had over 1,350 customers paying us over $1 million in ACV.

Our strategy of targeting the right enterprise customers that drive the best ROI and can grow with us over time is bearing fruit. In Q4, we closed 135 deals greater than $1 million in net new ACV in the quarter, up over 50% year-over-year. In addition, our Better Together story is resonating as 18 of our top 20 deals included five or more products.

Turning to profitability. Operating margin was 23%, one point above our guidance, primarily driven by the strong revenue beat. Our free cash flow margin in the quarter was 46%. For full year 2021, operating margin was 25% and free cash flow margin was 32%, representing $1.9 billion of free cash flow.

We ended the year with a healthy balance sheet, including $4.9 billion in cash and investments, putting us in excellent shape to continue investing in strategic initiatives to drive organic growth. Together, these results show the power of our business model and our ability to drive a balance of growth and profitability.

What’s more, we’re achieving all of this with a focus on ESG and winning the right way. Last quarter, I announced our commitment to reaching our net zero emissions goal by 2030, two decades earlier than our previous goal. This quarter, you heard Bill introduce Karen Pavlin, who will lead our efforts to strengthen our culture, ensuring equity and creating an even deeper sense of belonging.

Diversity, equity, inclusion are business imperatives for ServiceNow. And in 2021, we outperformed all six of our representation and hiring goals across three categories: Black, Hispanic and Latinx and Women in leadership. At its core, ServiceNow’s culture is one of belonging. It is core to who we are, and it will be one of the keys to our company’s growth for many years to come.

Moving on to guidance. Since the end of Q3, we’ve seen an incremental strengthening of the U.S. dollar, resulting in a material FX headwind in 2022. To help provide investors better visibility into the underlying strength of the business, I’ll be providing constant currency guidance. I would also note that in January, we completed an assessment of the useful life of our data center equipment and determined that we could extend their estimated life from three to four years. As a result, we expect a reduction in depreciation expense, which will contribute approximately 100 basis points to gross margin in 2022, trending down to just 50 basis points in 2024.

With that in mind, I’ll turn to our 2022 outlook. Last year was a strong year, and I’m excited to announce that our momentum will carry into 2022 as we do not expect any change in constant currency growth year-over-year. We expect subscription revenues between $7.02 billion and $7.04 billion, representing 26% year-over-year growth. That’s 28% on a constant currency basis, the same growth as 2021.

It’s an amazing achievement when you think about the fact that the base we are growing off of is $1.3 billion higher when we started just last year. We expect subscription gross margin of 86%, up 100 basis points year-over-year. We expect an operating margin of 25%.

With regard to operating expenses, we have reopened many offices and are planning in-person conferences and user events this year. Our sales force has also already begun to travel again. As such, we expect certain COVID-related savings we’ve seen over the past two years to stay in 2022.

We expect free cash flow margins of 31%, and we expect diluted weighted average outstanding shares of 204 million.

For Q1, I’m pleased to announce that we expect subscription revenue growth to accelerate year-over-year on a constant currency basis. We expect subscription revenues between $1.61 billion and $1.615 billion, representing 25% year-over-year growth or 27.5% constant currency growth. We expect cRPO growth of 28% year-over-year or 29.5% on a constant currency basis. We expect an operating margin of 25%, and we expect 203 million diluted weighted outstanding shares for the quarter.

In summary, we had a very strong Q4, and I’m so proud of what our team has accomplished over the past year and what they continue to achieve. The pace of digital investment is accelerating. Demand in 2022 continues to be strong. Enterprises are turning to ServiceNow to create new business models to address the new ways employees and customers want to engage. The Now Platform offers the speed, flexibility and innovation companies need. We’re well on our way to $15 billion and beyond and becoming the defining enterprise software company of the 21st century.

Before moving on to Q&A, Bill and I want to thank our employees around the world for a tremendous year. You are the key to ServiceNow success, and you all continue to make us, ServiceNow, strong.

And with that, I’ll open it up for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Phil Winslow with Credit Suisse. Your line is open.

[Phil Winslow, Credit Suisse]

Hi, team. Thank you taking my question and congratulations on a strong end to a really strong full year. Investors have been concerned this year about a potential pull forward in demand really setting the stage for a decelerating growth across software. Now looking at your results tonight and the guidance, I really can’t find any signs of decelerating demand for ServiceNow. In fact, sales and marketing headcount in Q4 grew at its fastest rate since Q1 2020, which suggests you’re continuing to lean in here. So two questions. First, Bill, my question to you is, what are you hearing from customers that gives you confidence in the sustainability of growth and to accelerate this go-to-market hiring exiting the year? And Gina, what trends are you seeing in terms of ramping these new sales and marketing hires. Thanks.

[Bill McDermott, President and Chief Executive Officer]

Thank you very much, Phil, for your kind remarks and also for your question. Customers are absolutely focused on technology being the business strategy. And digital transformation is in full flight, and we will capitalize on that greatly. The reality on our numbers is we did not see any evidence of unusual demand pull forward into our business for 2021. It happened in an extremely linear and coherent fashion, which was really a thing of beauty to watch from an execution perspective.

And as I look at the pipelines, they’re ever increasing, and they’re doing that across the platform, the employee experience, the customer experience, the creator experience. And all of this now is really making ServiceNow one of those real standard platforms for well-run companies in the 21st century. And I think that includes a very short list of others. We’re one of them. And Phil, the business just couldn’t be going better.

[Gina Mastantuono, Chief Financial Officer]

And then, Phil, on your question with respect to ramp rep, you’re absolutely right, we did not pause at all on our headcount growth in Q4. We’re entering 2022 with more ramped sales reps than we entered 2021, and we feel really good about pipeline and the demand that we see in front of us. So we are absolutely not stopping our investment in go-to-market resources. We are planning for a very strong 2022.

[Phil Winslow, Credit Suisse]

Awesome. Thanks team. Congratulations again.

[Gina Mastantuono, Chief Financial Officer]

Thank you, Phil.

[Bill McDermott, President and Chief Executive Officer]

Thank you, Phil.

[Operator]

Your next question comes from the line of Raimo Lenschow with Barclays. Your line is open.

[Raimo Lenschow, Barclays]

Congrats from me as well. Well done. The – can we talk a little bit about the revenue or you’re achieving with one of your biggest clients you have like a record number now or people over $1 million in ACV. But the ACV number is also going up, like – Bill, can you talk a little bit about how you see this trending going forward with all the different products that you have, but also the product expansion that you’re seeing there? How do you think this will evolve over time? Thank you.

[Bill McDermott, President and Chief Executive Officer]

Raimo, excellent question. This is really a beautiful point in the scale phase that ServiceNow is in. And you might notice the substantial promotion for CJ in addition to taking on his normal great results for development and engineering. He’s now moving into the industry phase where we’re going to connect the code to the actual industry-specific solutions the specialist professionals that guide our general line sales force and our customer relationships each and every day. And that’s going to give us a real special bilateral communication with our customers to innovate at an even faster clip than we have in the past, if that’s possible.

And you see what happens in telecommunications, in financial services. You see what happens in government, health care, life sciences. All the businesses that we’ve chosen to focus on from an industry perspective are really scaling and doing so very, very quickly.

And here’s where the big deals have only just begun. If you look at businesses today, and there’s one retailer in particular that I referenced in the call like CBS, which is a great company, they have retail customers, but they’re also transforming into a health and wellness company, and they understand the experience that they have to give their customers is evolving into a multi-workflow environment.

So on one hand, I have to keep my associates super happy because they have complex enough jobs. I have to keep my customers happy because, in some cases, they want to come to the store. In other cases, they want the store to come to them. I’m transforming my business model between all of these factors, and now I’m going for health and wellness. And someday, I’ll not only do that in store, but I can do that at the home. So you’re seeing multi-complex workflows possible on the Now Platform coming together to form greater-sized solutions that have major business impact for our customers and the value we can create with digital transformation.

So the challenge I’ve got out to the company, Raimo, is the large deals will accelerate dramatically on a year-over-year basis. We are now prepared for that, and we have the best leaders in the positions in the company to deliver that, and we have an extremely inspired workforce and an extremely inspired ecosystem. So all that comes together. And as you know, I’ve seen the movie before. When it all comes together, it equals big growth.

[Raimo Lenschow, Barclays]

Sounds very exciting. Thank you.

[Bill McDermott, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.

[Alex Zukin, Wolfe Research]

Hey, guys. Congrats on a great end to the year. Bill, maybe the first one for you. If you think about what you just said to Raimo’s question about being in a great position to massively accelerate the amount of large deals, is it right to kind of think that industry clouds and the low-code platform vision, that’s the big motion that you think will unlock the most value in some of these larger deals, even more – maybe even more so than HR, CSM? Or what’s the right way to think about like the growth drivers of these expansion opportunities over the course of the next year? And look, it doesn’t escape all of us the valuation contraction we’ve seen in the public markets. Does it change or in any way influence your strategy or thought process around organic versus inorganic growth?

[Bill McDermott, President and Chief Executive Officer]

Yes. Alex, that’s a really significant set of issues, and I’ll address them head on. First of all, every great company has a great core business. Because when you have a multibillion core business, that core business has to perform, so you get the leverage on all the adjacencies. Our core business is better than ever, and it’s growing really strong. In fact, I think it could be very close to the overall corporate growth rate as we look into the crystal ball.

Then you add on employee experience. You have to remember, this employee experience and the future of work and where people are going to be working and how they’re going to be working, especially exacerbated by a talent war out there, is really a big deal. And CEOs need to retain the people they have now. They better be recruiting and onboarding in a flawless manner because the employees today expect consumer-grade user experiences in the enterprise. And if they don’t get them, they even don’t come on in the first place because they know what’s going on in these companies. The Internet tells them that. Or when they get there, they don’t stay very long because they’re not happy. So the employee experience is front and center.

And then on customer service management, the reality is this is just starting because the world is really acknowledged that the customer is not going to come to you the way they used to. You’re going to have to go to them, and you’re going to have to explain to that customer that your brand gets it and you can give them an experience no matter where they’re experience in your brand that has enormous consistency, service value, and yes, even helpful hands in terms of smart transactions through an AI platform like ServiceNow.

And then you take the creative workflow. Look, 500 million applications between now and the end of 2023 is more applications that have been built in the last 40 years. So there’s no choice. It’s going to be low code, no code, and the ServiceNow platform is beautifully positioned.

Now let me extend to your question on industry and low code. That is absolutely a very astute observation because if you take the low-code revolution and you combine it with industry, we’re now solving business problems that have been out there for a long time. We featured the Celonis partnership where they could do the X-ray and the non-ServiceNow installed environments. We can activate all the changes that are necessary to augment the business process on the now action layer.

And of course, here’s the big thing, all those systems out there have been mass customized. But with ServiceNow, you can carry forward all your customizations with the creative workflow. You don’t need a team of consultants in a truck coming over there for years and years projects and billions and billions. This is speed to market. This is low-cost rollout of big ideas and business model innovations and better service for the employee and the customer. So it all comes together.

And the reason I’m so excited about what we’re doing with the executive team here is we’re all lined up now to take everything we know how to do and scale it across the world in every geo, in every industry and every persona. And I have to thank my partners out there. I mean they’re knocking down the door to get a bigger piece of the ServiceNow franchise. So it’s all of those things coming together, Alex.

Now on M&A, I want to be really super clear about this. We have no targets on the Board for M&A. And the reason for that it is on an organic growth basis. You see the numbers as much as I see the numbers. The cloud economics are in full flight. And we have engineers that love this company, and they love coming to work every day, whether they’re working out of their home or our office, we’re all open. And they come in and they create new things and they have an idea that they can take and they have a dream that they can build. When I listen to other engineers and other software companies that want to come over here tell me they spend 90% of their time integrating the past as opposed to innovating the future, it just reminds me of how thoughtful we have to be on M&A.

So as Gina said, we have $5 billion in cash. That’s going to continue to grow exponentially you know that. We’re fueling our organic growth ambitions. We can be opportunistic. But in this guide and this current state of affairs, there is no intent to do any large-scale M&A. And if that were to change, I would be the first to tell you.

[Alex Zukin, Wolfe Research]

Incredibly specific, and we all love the candor and appreciate that color. I guess maybe just a quick follow-up. First of all, congratulations to CJ. What a wonderful expansion of his abilities and opportunities. I wanted to ask about the shift on the Chief Customer Officer. What plays – Workday as an example, another company that’s made a move to historically make the head of Europe the head of overall sales. I wanted to ask, what – in terms of the motion that you’re seeing successful in – outside of the U.S. that can be applied to the rest of the organization, and particularly inside the U.S., what plays are successful that you think can be run or expanded that will work?

[Bill McDermott, President and Chief Executive Officer]

Well, first of all, I want to tip my cap to our regional presidents because they know I love – and I love all of them. We have great leadership with Mitch in APJ, great leadership with Mike in the Americas and now Ulrik coming on in EMEA. I know them all personally. I admire them deeply, and I really appreciate what they’re doing for ServiceNow. And they’re all playing critical roles in our future.

Mike as an example has done an extraordinary job here for a very, very long period of time. And 65% of the number resides in his past. So he knows what we think of him. And I've always told our leaders that this is a significant company, and each piece of this puzzle needs to be managed with incredible care, and these are the leaders that will do that.

Now Paul Smith brings a very unique style and know-how, especially around the expansion of the C-level relationships where he has proven himself in an exemplar fashion for the 18 months that he has been here. And as you know, we had a great track record before we got here. And he understands all the concepts that I put out on this call today because he's been through them and we're activating them together and we know exactly what we are doing.

And the other thing is with CJ and the closeness that CJ and Kevin have had all these years, that continues. Kevin is still with me. And CJ is right with me. And Paul is right with me. So we're all putting this together, and we're going to activate it in every region and every industry and across every persona. And what I'm so inspired by is these executives. I respect them with my whole heart, and they're doing a fabulous job, and they want ServiceNow to be defining enterprise software company in the 21st century. And they all want it as badly as I do, which is why I know it's going to happen.

[Alex Zukin, Wolfe Research]

Thanks so much, guys and congratulations.

[Bill McDermott, President and Chief Executive Officer]

Thank you very much.

[Gina Mastantuono, Chief Financial Officer]

Thanks Alex.

[Operator]

Your next question comes from the line of Kash Rangan with Goldman Sachs. Your line is open.

[Kash Rangan, Goldman Sachs]

Hi, what an incredible finisher, 2021. You have more than $5 billion in revenue, and you have close to 11 plus in RPO that you are hardly within sight of your long-term goal, Bill and team. So kudos on that wonderful milestone.

Bill, my question for you is, certainly, your vision of the platform revolution taking over from the database, relational database, middleware, that whole stack old revolution is a very compelling one because you can bring value to customers, pressing problems immediately, right? So that's been the long-term thesis of ServiceNow.

Now a little bit more tactically, as you head into 2022, we've got no need to reiterate, but very briefly, inflation pressures, labor shortage, supply chain shortage and a need to boost productivity despite all these constraints. How do you see the Now Platform being equipped to handle these challenges, these tactical challenges in the near-term for corporations with your execution? Thank you so much.

[Bill McDermott, President and Chief Executive Officer]

Well, I really appreciate the question. Thank you so much for your kind remarks. I really do, Kash. Thanks a lot. ServiceNow has a unique ability to drive more efficiency and automate these processes and is absolutely a deflationary tool that helps alleviate the need for more hiring. Many companies think the only way to solve a problem is throw more bodies at it while we have no quarrel with increasing jobs. If there's a limited pool of digital assets, that's a problem. And that's why you need ServiceNow.

So driving the productivity and efficiency out of the resources enterprises already have, helping them reduce the need for additional spend is our lead play in the playbook for the scenarios you laid out there.

And one simple example, take virtual agents deflecting and automating tickets so that the IT help desk personnel can spend their time tackling more strategic issues, giving them more satisfaction with their job and creating a happier work environment. And this also reduces the need to hire more people in the first place. But then really smart CEOs are literally struggling every day now how I keep my people.

And the only way to keep them is to give them a great experience. And they're going to feel you right out of the gates. If you recruited them and you can't onboard them properly, they're going to feel you if you can't train them and activate a customized training curriculum that's targeted specifically to their unique skills and attributes. And they're going to feel you real quick if they can't go to one portal to activate all of their services on their mobile device. So no matter where they are, their company's brand, their company's culture is talking to them.

And then when you do need to manage these cases with people. My goodness, legal could be involved Finance could be involved. HR could be involved. COOs and CEOs could be involved. And most companies have literally thousands of cases that are in flight at any one time. Only ServiceNow, only ServiceNow can manage the multidisciplinary workflows that go across an organization in many different circular forms to close out a case properly. That's what we do, Kash.

So I lean into the inflation conversation, the labor conversation. We're more and more activated now and straighting out supply chain dilemmas. We have one manufacturer in the auto industry that has us as the control tower for their entire supply chain now. A few years ago, nobody would even know that. We are solving ERP cases left, right and center with ServiceNow as the action platform.

So I think the idea of this productivity, and I mentioned it in my discussion earlier, really manifests itself in our new impact product. We took a service, productized it in software where we can look at the entire value chain on the Now Platform, the entire value chain from the presale to the sale and the post-sale, all the activities that have taken place in the deployment in relation to the value that's being delivered in real-time with hard dollars and cents and an absolute measurement that the customer can look at on their iPhone, that the partner participates in the conversation. Incidentally, we're not using any other technology with the Now Platform and that ServiceNow can use. So now just think about the gorgeousness of that conversation where, as we deploy, we can show the business outcome. And the partner and ServiceNow and the customer are all on the same sheet of music on the Now Platform with ServiceNow Impact.

Kash, it's amazing. We have 17 customers in the pilot join up on the Impact platform before we even launched it. We're now GA on it, and we're launching it with all of our employees globally tomorrow in every geography. This is going to create a renaissance of value delivery in the enterprise, the likes of which has never been seen before.

[Kash Rangan, Goldman Sachs]

Profoundly exciting. Thank you so much, Bill.

[Bill McDermott, President and Chief Executive Officer]

Thank you, Kash.

[Operator]

Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open.

[Keith Weiss, Morgan Stanley]

Excellent. Thank you guys for taking the question. And let me echo the congratulations on a great quarter and a great year. I want to follow-through on Kash's interesting question and kind of turn it inward to ServiceNow. And so Bill, from your perspective, do you see any constraints in terms of your partners finding the people or your customers finding the people to be able to deploy ServiceNow? We're hearing about that from some of our checks and some of the systems integrated. It's just such a tight labor market. Are the people there to sort of deploy the solution? Or could that become something of a friction to just getting ServiceNow up and running?

And to Gina, are you seeing any incremental or increased wage inflation in terms of sort of – you guys are hiring very aggressively, and I think headcount is up 29% year-on-year. So you're definitely finding the people. Is there any increase in wage inflation or anything extraordinary on that side of the equation given that tight labor market that might impact margins on a go-forward basis?

[Bill McDermott, President and Chief Executive Officer]

Well, thank you very much for the question, Keith. As I mentioned earlier, we are one of these significant partners to the global SIs. So if you look at the top five technology partners for the top 10 SIs, we're one of them. So while they may have some difficulty hiring to meet demand, we are getting preferential resource allocation, not only as a top five technology partner, but also because our swelling pipeline and our growth is so amazing that they all want more of that real estate. And where they have less interesting growth scenarios with other partners, they're actually peeling off headcount in favor of the ServiceNow practice. This is happening all the place.

In addition, one of the things we have done is we took matters into our own hands and built out academies. And we're doing more for university programs to meet the demand, the ServiceNow train talent. And I'd note that we've also been working with our partners to sponsor and engage with local diversity profit and nonprofits to target diverse populations for next-gen skill development, which will help alleviate such labor shortages in the future. We have to initiate people into the digital world that perhaps aren't initiated but it’s certainly more than capable.

And I always go back to the root cause of why ServiceNow is so special. When Fred Luddy created this company, he created a platform that was a sensation, and it was designed to give people productivity, a tool to enable them to do things with their lives and their jobs that they could have never done without it. And I think that level of simplicity and agility in the general construct of the platform makes it so much easier for people to learn and develop and grow on it. And now they see where we're going. They know it's a growth sensation. And you know how it is, rising tide kind of lift all boats, and everybody wants to get on this one.

[Gina Mastantuono, Chief Financial Officer]

And then, Keith, on your question with respect to labor inflation rates. Enterprise software's talent has been in high demand for some time now. So competitive compensation has been on the rise, and it's not new for us. We continue to monitor it. We definitely anticipate some continued pressure in the coming quarters, but we remain very committed to our margin guidance that we've given you for 2022 and beyond.

[Keith Weiss, Morgan Stanley]

Upstanding. Thank you so much for the detail.

[Gina Mastantuono, Chief Financial Officer]

Thanks Keith.

[Bill McDermott, President and Chief Executive Officer]

Thank you, Keith.

[Operator]

Your next question comes from the line of Michael Turits with KeyBanc. Your line is open.

[Michael Turits, KeyBanc]

Hey, thanks very much, guys and congrats on the quarter. One for Bill and one for Gina. So Bill, I want to talk about a couple of submarkets that you have made acquisitions and specifically in RPA and observability and how you're thinking about those markets and your strategy, whether this will be really directed at existing larger ServiceNow implementations or how directly you're going to go into those types of deals. And then something for Gina.

[Bill McDermott, President and Chief Executive Officer]

Yes. Of course. Well, Michael, thank you very much. First of all, we are very excited about Ben, his leadership and the whole Lightstep team. As you know, they have been doing a great job winning amazing forward-thinking brands, and they have been doing a phenomenal job culturally integrating back into ServiceNow. So we are going to begin going to market with Lightstep, and that's going to be at mass scale, and that will be announced at the employee kickoff tomorrow. So that's exciting. And the work with Lightstep to not only serve the needs of IT but to observe things in a way that can be consumed across the value chain of decision-makers in an enterprise is pretty big.

And then RPA, this whole process mining, RPA and AI, the platform for hyper automation is the ServiceNow platform. That's a huge point. And CJ and his great team, unbelievable team, they are making a major release in RPA, as you know, in our San Diego release. So more and more customers will benefit from the power of the ServiceNow platform, including RPA built into the San Diego release. It's an exciting release. What Amy Lokey and the team have done also on the user experience. I mean, we sort of demonstration of it with the Board. It's unbelievable.

You know when you're dealing with ServiceNow because you're going to have one gorgeous user experience, and it doesn't matter what area of the platform you're looking to enable. It's all one gorgeous user experience. And I mean, I've never seen anything better. And it is the scale story all the way.

And when we hit Tokyo in September, I hope to be in Tokyo with that announcement because I want to reach out to my great friends in Japan as a Japanese expression called dantotsu, and that underscores the spirit of ServiceNow to be better than the best. And that's the standard that we hold ourselves to. And the marketplace in Japan is really getting the memo on the power of ServiceNow and what we can do to liberate them into the cloud, and that’s going to be an exciting part of our growth story.

[Michael Turits, KeyBanc]

Great. Thanks, Bill. And then, Gina, just some clarifications on the extension of the useful life. So you got essentially to flattish op margins but down a bit, like 70 bps on free cash flow. So just making sure that I understand it, and then obviously, you get that benefit to EBIT margins, but that flows through, and we see it on free cash flow because this is just a non-cash, and you’re actually including expenses. So I want to make sure those mechanics are right. And then also, do you get in year two of this – do you get that tailwind to EBIT and accrual? Does that flip around to a headwind on EBIT margins and gross margins?

[Gina Mastantuono, Chief Financial Officer]

Great question, Michael. So you’re absolutely right, the benefit that you’re seeing this year hit EBIT and operating margins, but not free cash flow, right, because it’s just a change in depreciation, which is a non-cash, right? So that’s the reason why you’re seeing the benefit in operating income, but not in free cash flow. What you are seeing is free cash flow is the increased cost that I’ve been talking about as the COVID savings start to fade in 2022 as we come back in person for digital events and in-person events and travel.

With respect to the longer tail of this change in depreciation, it definitely tapers off and gets smaller, right? So it’s a 100 basis point benefit this year by 2024. It goes down to just 50 points, right? So – and that’s only on the EBIT margins, not on free cash flow.

[Michael Turits, KeyBanc]

Okay. Thanks very much Gina and Bill.

[Gina Mastantuono, Chief Financial Officer]

Of course. Thank you.

[Bill McDermott, President and Chief Executive Officer]

Thank you very much. Appreciate it, Mike. Thank you.

[Operator]

Your next question comes from the line of Brad Zelnick with Deutsche Bank. Your line is open.

[Brad Zelnick, Deutsche Bank]

Great. Thank you. Bill, Gina, my congrats as well to you and the entire team and especially the CJ and the others that are so deservedly being elevated within the organization. Bill, you personally have been serving enterprise technology customers for many years. And many of us have been students of the industry for a long time as well. And I hesitate to say this, but it feels like this time is different. This digital transformation freight train just keeps steam rolling down the tracks. And rather than ask you to tell us about the environment, which is obviously very strong for what ServiceNow delivers, I would instead ask you, if you agree with my characterization, why do you think this time might be different?

[Bill McDermott, President and Chief Executive Officer]

Thank you for the question. It is entirely different. It is entirely different because the technology that is available to customers today can be so transformative. And I believe strongly that the Now Platform from ServiceNow is literally the control tower, the platform for digital transformation or digital business. And the reason I feel so strongly about that is the enterprise has been so behind in consumerizing experiences for people. And now with ServiceNow, these leaders of companies can finally say, all I hear is good news.

My HR leader tells me that all the clunkiness of the past goes away with ServiceNow, and my people are happy, and they’re getting what they need. My Head of Revenue is telling me, wow, we could finally now do all the remote heavy thinking and diagnostics in a fully digital way, and we can bring our story to the customer and have that frictionless digital experience that’s easily repeatable drives tremendous customer SAT and NPS and creates the loyalty effect. Wow, we’re finally there.

And then we can finally break through where companies are trying to refresh old applications. They can say, wow, now I can empower my people. They can build the new innovations. They can refresh the old but build the new innovations. And tech is the idea of liberating, not replacing people and creating more economic value and value-add. Plus every own person today doesn’t want to work for just a paycheck. They want to purpose. And I think our purpose to make work better for everyone is absolutely the right way to go. And I think that the leaders of companies want that for their company. And therefore, I think the confluence of all of this on one platform with one consumer-grade user experience for all people, whether they’re inside or outside the company, a platform that could take cost out and build revenue in is what this generation is waiting for.

And once people are aware of ServiceNow, we win every time. So one of the moves that we’ve made, and I’m sure you’ve seen the pivot with the world works with ServiceNow, is bringing the world the brand that it deserves from ServiceNow. And I think that’s going to really turn on a lot of people to say, aha, I might have been a C-level decision maker that knew my IT people were happy with ServiceNow. I just never knew why. Once I started to learn about it or asked about it, now I know that they can activate transformation in all dimensions of my company, not the least of which is be the action layer for the whole enterprise.

And I keep telling people when I meet with the CEOs, like we have good systems of record. They’re all very fine. But I don’t use them. We only use ServiceNow to run ServiceNow. And that’s why our people are so happy because everything works.

[Brad Zelnick, Deutsche Bank]

Awesome. Thank you for the perspective, Bill.

[Bill McDermott, President and Chief Executive Officer]

Well, thank you, Brad. Thanks very much.

[Operator]

Your next question comes from the line of Pat Walravens with JMP Securities. Your line is open.

[Pat Walravens, JMP Securities]

Great. Thanks very much. Bill, congrats on the terrific results and outlook. I love hearing the enthusiasm. Could you drill down deeper for us on the relationship with Celonis? And how ServiceNow and Celonis work together to solve customers’ problems?

[Bill McDermott, President and Chief Executive Officer]

Yes, I absolutely will. And thank you very much for your kind remarks, and we appreciate it. I want to go back a little bit in time on this one. There once was a time where these gentlemen graduated from Technical University of Munich. We call it TUM over in Germany. And I got to know Alex very well several years ago and also his co-founders, and we built a very strong friendship. And he used to laugh because he sent me a note in December telling me about his business. And within a few minutes, I’d get back to him, and he never forgot that.

And I still get back to him within a few minutes, and we still have a great friendship. And we know that we have delivery the past and move it into the cloud. We know we need to put it on an automation platform that can really change business. And therefore, in the non-ServiceNow environments, especially where it’s an ERP environment, Celonis does a very good job in the process mining to actually understand where the breaks are and the opportunities are in the business process to drive business productivity and performance.

It is on that basis that we said, look, we should team up because our customers more and more are asking us to get involved, automating back-office business operations and business processes with the Now Platform. So we are essentially taking this relationship and applying automation that truly move the needle for organizations to understand how workflows across the people, processes and systems of their companies. And we’re helping map those elements in real time and building digital workflows to more efficiently automate work because the X-ray by itself doesn’t really help. We have to then put it on the action platform to actually automate it to drive a result.

So our engineering teams have created a seamless product experience that’s going to make it easy and simple for customers to get the insight into the process across multiple, I might add, enterprise systems, and they’ll use Celonis EMS platform and convert that insight into action, automation and remediation with the ServiceNow workflow platform. And when you bring together process mining, automation, machine learning, RPA and low-code app development, and this touches on a question that came up earlier, low-code app development into a seamless product experience, customers will enable quick, continuous improvement with the flow of work.

And I stress quick because – and this touches on an earlier, very smart question. These opportunities haven’t been there for customers in the past, and they’re only going to start learning about them now, which is why I see an even bigger hockey stick as we look into the future because we can revolutionize old installed base problems into new market opportunities in the cloud that are just sensational in terms of the business value they drive for corporations all over the world.

[Pat Walravens, JMP Securities]

Okay. That’s super helpful. Thank you, Bill.

[Bill McDermott, President and Chief Executive Officer]

My pleasure. Thank you for the question, Pat.

[Operator]

We have time for one more question. Your last question comes from the line of Drew Glaeser with JPMorgan. Your line is open.

[Drew Glaeser, JPMorgan]

Hi. This is Drew on for Sterling. I was just wondering how the government vertical performed in the quarter and whether you could provide some more detail on that.

[Bill McDermott, President and Chief Executive Officer]

Yes, I’d be happy to. Our government business is truly a growth story at ServiceNow that is very, very special. So we look at the tailwinds in the U.S. federal market. It came through very strongly. It’s a big opportunity for us. What’s happening through is many of these agencies, they need or they have a mandate actually to digitally transform. One of the mandates is the President’s management agenda of PMA. Their vision is the administration’s guide to invest in the government’s capacity to deliver better results. And it’s aligning with ServiceNow’s core offering.

So for example, if you look at the pillars, it’s all about strengthening and empowering federal workflow in the workforce. It’s sharing data, sharing business processes, looking at things across boundaries. They have delivered excellent equitable and secure federal services and customer experiences. This is driving acceleration for better customer service.

If you look at their pillar three, it’s managing the business of government and that they want to make sure the systems work well. So this is all about business resiliency. Our cloud is extremely resilient. And they’re focused also on cybersecurity. And I think you’re familiar with that and the role that we could play in having a control tower for all the things going on from a security perspective. We can help other people’s solutions also tie into that control tower effect to manage the nation’s cybersecurity and obviously avoid recent ransomware attacks and other things.

They’re also focused on vaccine management. And we said a long time ago, I believe this was in March of 2020 when we said this that the old vaccine management process would be the greatest workflow challenge that government faces maybe in our lifetime. And as you know, we have the world’s leading solution for that with entire countries. Of course, part of the United States, Germany, Scotland, many countries, including in Asia running on the Now Platform for vaccine management and returning to work safely and so forth.

So all of this, to net it out, basically says that at the federal, the state, the local, the university and all public entities combined are focused on transforming digitally. They have to take these paper-based slow dangerous processes and put them in order. And the only way to do that is work home, digitize them and then execute the mission of government serving the people. And that’s why the public sector now represents double digits of the Now business, about 10% of our business.

And look, with the problems the government has in digitizing things, this should be one of the more sensational industry stories for us for a long, long time, which is one of the reasons why the great Kevin Haverty and I will be working very, very closely on the public sector initiative globally in his new capacity.

[Drew Glaeser, JPMorgan]

Got it. That’s very helpful. Thank you.

[Gina Mastantuono, Chief Financial Officer]

Thanks, Drew.

[Bill McDermott, President and Chief Executive Officer]

Thank you very much. Appreciate it, Drew.

[Operator]

This concludes today’s conference call. Thank you for your participation. And you may now disconnect.